daily markets commentary

Merchant West Capital Markets

USD/ZAR 14.9455 | EUR/ZAR 16.4277 | GBP/ZAR 18.1568

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email: treasury@merchantwest.co.za

Market Data:

02 Sep - GE: Markit/BME Germany Manufacturing PMI | UK: Markit PMI Manufacturing SA | SA: ABSA Manufacturing PMI | SA: NAAMSA Vehicle Sales (y/y)

03 Sep - EC: PPI (y/y) | SA: GDP Annualized (q/q) | US: Markit US Manufacturing PMI | US: ISM Manufacturing

04 Sep-  SA: Standard Bank South Africa PMI | EC: Markit Eurozone Services PMI | Retail Sales (y/y) | US: Trade Balance | Fed's Williams Speaks in New York

05 Sep - SA: Current Account as % of GDP | Current Account Balance | US: Nonfarm Productivity | Initial Jobless Claims | Continuing Claims | Markit US Services PMI

06 Sep - SA: Gross Reserves | Net Reserves | EC: GDP SA (y/y) | US: Change in Nonfarm Payrolls | Change in Private Payrolls

Market Commentary:

Local front - South Africa's rand rose to a three-week high early on Wednesday following a better-than-expected jump in second quarter economic growth, brushing off concerns over anti-immigrant protests locally and the ongoing U.S.-China trade dispute. At 08h40 the rand was 0.61% firmer at 14.9975 per dollar, its firmest level since Aug. 8, continuing the previous session's rally that saw the currency open at 15.2725 before the GDP data set the bids alight.

A clutch of African leaders threatened diplomatic retaliation, with Nigerian President Muhammadu Buhari saying he was urgently sending a special envoy to meet with President Cyril Ramaphosa to discuss the violence. South African police on Tuesday they had arrested well over 80 people and confirmed five deaths.

Bonds also firmed, with the yield of the benchmark paper due in 2026 ZAR186= down 2.5 basis points to 8.125%.

Local Data front - Tuesday 3 September, was not exactly early Christmas, but Statistics South Africa (StatsSA) unwrapped a pleasant surprise. In Q2 the economy rebounded strongly, growing 3.1% against expectations of a 2.4% expansion which was forecast by a Reuters poll. This followed a brutal 3.1% contraction in Q1, triggered in part by excessive load shedding.

This rare piece of good economic news comes against the backdrop of an unemployment rate of 29%, violent xenophobic riots, mounting government debt levels and glaring income disparities which are probably widening. So no one is breaking out the bubbly.

“It’s a non-event. Mining boosted the numbers massively. Q3 will offer some mild growth, but the growth rate we had in Q2 won’t be sustained,” George Glynos, head of research and analytics at ETM Analytics, told Business Maverick. Mining had a big rebound after slumping in Q1, partly because of that quarter’s wave of rolling power cuts. “Mining was the strongest performer in the second quarter, expanding by 14.4%. This was the industry’s strongest showing in three years since the second quarter of 2016 when production jumped by 16.3%,” StatsSA said. Iron ore was the main driver here while gold maintained its inexorable decline, contracting by 4.1%.

Finance, real estate and business services had brisk growth of 4.1%, while trade sales and manufacturing rose. But agricultural output fell by 4.2% while the construction industry remained mired in recession, shrinking by 1.6%, its fourth straight quarterly contraction. These trends are very worrying as both sectors are labour-intensive and have the potential to create desperately-needed jobs. Sectors that are growing, such as banking, are unlikely to create huge numbers of jobs. “While the worst of the load shedding now seems to be behind South Africa, the global backdrop may yet prove to be a hurdle to a full-blown recovery,” said Razia Khan, Standard Chartered Bank’s chief economist for Africa and the Middle East. There is plenty of evidence that the recovery is fragile at best. South Africa’s trade balance sank unexpectedly into deficit in July, while the August Absa Purchasing Managers’ Index (PMI) highlighted low confidence levels.

Meanwhile, the latest wave of xenophobic violence to rock Johannesburg underscored how unemployment and poverty are helping to fan the flames of social unrest and discontent. Growth for 2019 is likely to be anaemic at best, which will do little to resolve the challenges of joblessness, poverty and inequality that still disfigure South Africa.

International front - The dollar pulled back on Wednesday as weak U.S. manufacturing stoked wagers on aggressive policy easing, while the British pound recouped losses in the wake of a parliamentary vote that opened the door for another Brexit delay. Manufacturing activity in the world's biggest economy contracted for the first time in three years last month, according to the Institute for Supply Management. That knocked the wind from the greenback and rallied the bond market as investors increased bets on a couple of Federal Reserve rate cuts before Christmas.

A 25-basis-point cut is now fully priced in, while yields on benchmark 10-year Treasuries, which fall when prices rise, dropped to their lowest in two years. As a result, the greenback gave ground to the yen, the Australian dollar, and the pound. Sterling climbed as high as $1.210 in early Asian trade, helped by the possibility that a no-deal Brexit may yet be averted.

"The expectation that the Fed will come to the rescue has increased," said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney. “But it's not a capitulation on the dollar. It's just merely stopped the recent rise of the dollar. “Against a basket of currencies the dollar traded slightly lower at 98.944, which was 0.4% below the two-year peak it touched on Tuesday. The sterling was pushed higher after British lawmakers voted to take control of the parliamentary agenda and scheduled another vote on Wednesday. If the vote is successful, it would force Prime Minister Boris Johnson to seek more time from the European Union and prevent leaving the bloc without a divorce deal. The prospect of a so-called "hard Brexit" has been a major source of worry for currency markets. The pound had dropped under $1.20 and hit its lowest since a flash crash in October 2016 on Tuesday.

The euro was steady around 1.2087 against the greenback, a recovery from a 28-month low against the dollar that it touched on Tuesday, as investors priced in deeper negative interest rates for longer in the euro zone. There were few signs of a breakthrough in U.S. China trade negotiations with President Donald Trump taking to Twitter to warn he would be "tougher" on Beijing in a second term if trade talks dragged on.